Determinants of demand
Revision as of 17:49, 16 June 2009 by Vipul (Created page with '==Definition== The '''determinants of demand''' of a particular good, service or commodity refer to all the factors that determine the demand of an individual or household for t...')
The determinants of demand of a particular good, service or commodity refer to all the factors that determine the demand of an individual or household for the particular commodity. The main determinants of demand are:
- The (unit) price of the commodity.
- The tastes and preferences of the individual or household.
- The prices and nature of substitute goods, i.e., goods whose consumption can replace the consumption of the given good. The cheaper and better the substitute goods, the less the demand, ceteris paribus. This is termed the substitution effect.
- The prices and nature of complementary goods, i.e., goods for which increased consumption makes the consumption of the given good more worthwhile. A drop in the price of complementary goods leads to an increase in demand, ceteris paribus.
- The disposable income that the household has. More specifically, the fraction of household income that it is generally willing to spend on that or related commodities. An increase in income leads to an increase (or at any rate, no decrease) in demand for most goods. This is termed the income effect. Goods for which the income effect is reversed are typically inferior goods. For these good, demand may drop with a rise in income.
- Expectations of future prices. This is particularly important for durable goods for which there is no urgency to purchase. In general, if future prices are expected to be lower, demand is less for a given price, because a person decides to delay the purchase. If future prices are expected to be higher, demand may be higher for a given price, because a person prefers to buy now before the good becomes too expensive.